In the Matter of UKLI Ltd; Secretary of State v Baljinder Chohan (2013)

Summary

Where an individual was properly characterised as a de facto and shadow director of a company which he had sanctioned and encouraged to operate an unlawful collective investment scheme, and where he had procured the company to make improper loans and dividends, it was appropriate to disqualify him from acting as a director under the Company Directors Disqualification Act 1986 s.6 for a 12-year period.

Facts

The claimant secretary of state sought a disqualification order under the Company Directors Disqualification Act 1986 s.6 against the first defendant (C).

A company (U) which had carried on business selling parcels of land to investors was investigated by the Financial Services Authority (FSA), who concluded that its operation of a collective investment scheme, which was a specified activity under the Financial Services and Markets Act 2000, without authorisation was unlawful. In 2008, U went into administration and then liquidation. The secretary of state issued proceedings against U's directors, but prior to trial five of the defendants agreed to give disqualification undertakings under s.7(2A) of the 1986 Act. The undertakings were accepted and the trial proceeded against C only.

C disputed that he was or had acted as a director of U in the relevant period. The secretary of state accepted that C was not a de jure director, but contended that he was a de facto or shadow director, and that U had operated, to C's knowledge and at his ultimate direction, an unauthorised and prohibited collective investment scheme, and that C had caused U to make loans and pay dividends that were not in the interest of U and its customers.

Held

(1) The purpose of a director's disqualification was to protect the public from unscrupulous corporate management. That objective would be frustrated if a person who was actually responsible for such management could escape disqualification by never formally being appointed a director. Section 6 of the 1986 Act extended to de facto directors, Lo-Line Electric Motors Ltd, Re [1988] Ch. 477 applied. A de facto director was so characterised by presuming to act as a director, being part of the corporate governing structure and directing the company's affairs in relation to the acts or conduct complained of. A shadow director was defined in s.22(5) of the 1986 Act, and s.6(3C) expressly provided that directors included shadow directors. A person could act as both a shadow and de facto director, Secretary of State for Trade and Industry v Deverell [2001] Ch. 340 followed. On the evidence, C was properly characterised as having acted as a de facto and a shadow director of U (see paras 24, 41-42, 44, 49 of judgment). (2) An unlawful collective investment scheme within the meaning of s.235 of the 2000 Act arose where an investment scheme's participants had no day-to-day control over the management of property, there was a pooling of the participants' contributions and the profits and income out of which payments were to be made to them, and the property was managed by or on behalf of the operator of the scheme, Sky Land Consultants Plc, Re [2010] EWHC 399 (Ch) applied. U's scheme and the manner in which it operated involved the collectivisation of plots of land with the objective of investment profit from the site, all managed by U. It therefore amounted to a collective investment scheme. C was well aware of the collectivised nature of what was offered and the FSA's concerns, but had sanctioned and encouraged U to proceed with it, acting in that regard as if he was U's managing or predominant director (paras 66-67, 124, 138). (3) On the evidence, C had procured U to make improper loans and dividends (para.168). (4) C's conduct constituted a sufficient departure from the standards to be expected of him to make him unfit to be concerned in the management of a company, and a disqualification order was therefore mandatory (paras 172, 175). (5) The appropriate period of disqualification in C's case was 12 years, Sevenoaks Stationers (Retail) Ltd, Re [1991] Ch. 164 followed (paras 176-181).